Whitney Tilson: How to Avoid -- And Profit From -- Manias, Bubbles and Investor Irrationality

Whitney Tilson presented a very interesting presentation on behavioral finance. Brief excerpt followed by full document in scribd:

This sort of decision fatigue can make quarterbacks prone to dubious choices late in the game and C.F.O.’s prone to disastrous dalliances late in the evening. It routinely warps the judgment of everyone, executive and nonexecutive, rich and poor — in fact, it can take a special toll on the poor. Yet few people are even aware of it, and researchers are only beginning to understand why it happens and how to counteract it.

Decision fatigue helps explain why ordinarily sensible people get angry at colleagues and families, splurge on clothes, buy junk food at the supermarket and can’t resist the dealer’s offer to rustproof their new car. No matter how rational and high-minded you try to be, you can’t make decision after decision without paying a biological price. It’s different from ordinary physical fatigue — you’re not consciously aware of being tired — but you’re low on mental energy. The more choices you make throughout the day, the harder each one becomes for your brain, and eventually it looks for shortcuts, usually in either of two very different ways. One shortcut is to become reckless: to act impulsively instead of expending the energy to first think through the consequences. (Sure, tweet that photo! What could go wrong?) The other shortcut is the ultimate energy saver: do nothing. Instead of agonizing over decisions, avoid any choice. Ducking a decision often creates bigger problems in the long run, but for the moment, it eases the mental strain. You start to resist any change, any potentially risky move — like releasing a prisoner who might commit a crime. So the fatigued judge on a parole board takes the easy way out, and the prisoner keeps doing time.

Decision fatigue is the newest discovery involving a phenomenon called ego depletion...

…These experiments demonstrated that there is a finite store of mental energy for exerting self-control…

…Today we feel overwhelmed because there are so many choices. Your body may have dutifully reported to work on time, but your mind can escape at any instant. A typical computer user looks at more than three dozen Web sites a day and gets fatigued by the continual decision making — whether to keep working on a project, check out TMZ, follow a link to YouTube or buy something on Amazon. You can do enough damage in a 10-minute online shopping spree to wreck your budget for the rest of the year.

The cumulative effect of these temptations and decisions isn’t intuitively obvious. Virtually no one has a gut-level sense of just how tiring it is to decide. Big decisions, small decisions, they all add up. Choosing what to have for breakfast, where to go on vacation, whom to hire, how much to spend — these all deplete willpower, and there’s no telltale symptom of when that willpower is low. It’s not like getting winded or hitting the wall during a marathon. Ego depletion manifests itself not as one feeling but rather as a propensity to experience everything more intensely. When the brain’s regulatory powers weaken, frustrations seem more irritating than usual. Impulses to eat, drink, spend and say stupid things feel more powerful (and alcohol causes self-control to decline further). Like those dogs in the experiment, ego-depleted humans become more likely to get into needless fights over turf. In making decisions, they take illogical shortcuts and tend to favor short-term gains and delayed costs. Like the depleted parole judges, they become inclined to take the safer, easier option even when that option hurts someone else.

About the author:

Jacob Wolinsky

My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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